Real-time payments are on the rise

The Federal Reserve plans to attract up to about 8,000 financial institutions to FedNow, its new instant payments network, and it has at least 1,000 in the pipeline to add, a Fed official said this week.

While there are nearly 10,000 financial institutions in the country, only about 9,200 of those banks and credit unions are actively using Fed services, so the central bank’s goal for FedNow isn’t necessarily to draw them all, FedNow Head of Payments Product Dan Baum said Wednesday.

So far, about 700 financial institutions have connected to the network since it was launched last July, and the central bank has been eager to lure more to the system in the interest of creating as much reach for the network as possible. The new system will allow consumers and banks to settle payments in seconds, as opposed to days, and provide services at all hours and on weekends.

“We see the policy objective to be to get everyone that's willing to, and can, and can make a business case,” Baum said in a wide-ranging interview with Payments Dive. “We expect that to be somewhere in the 7,000 to 8,000 range at the end of the day.”

There are some 1,500 smaller financial institutions largely dependent on paper checks so the Fed doesn’t expect to lure them all to FedNow, said Baum, who is a senior vice president at the Atlanta Federal Reserve Bank.

That said, FedNow has at least 1,000 financial institutions in various stages of FedNow onboarding, Baum suggested. “We have a very robust pipeline of very interested (FedNow) customers in the four digits,” he said.

While about 60% of the institutions that have signed up for FedNow can receive payments, a smaller 40% have signed up to send payments, Baum said. That likely reflects some concern about the potential for fraud, though the Fed is seeking to address those risks through circuit-breakers, as in shutoff controls; working with stakeholders; and analyzing anomalies in data.

The rate of FedNow sign-ups has been seen as slow in some corners of the industry, particularly with respect to a few large banks still not joining in yet. That experience echoes a slow pace of adoption for FedNow’s private sector rival, the RTP network, which was launched by The Clearing House in 2017.

Still, the start of FedNow last year seems to have instigated more interest generally in the real-time payments capabilities, with the bank-owned RTP posting a faster rate of adoption since its FedNow competitor’s launch in July.

The Fed is unlikely to ever mandate use of the FedNow system, and it would likely need new authorities to make that happen, but it could seek to boost bank adoption, if needed, by provide pricing incentives, or other types of incentives in the future, he said.

“We certainly have a toolkit on the shelf,” Baum said. “I'm not sure we're ready to pull the things off the shelf because we're seeing the numbers that we want so far.”

The Fed envisions a variety of potential use cases from basic capabilities like catering to the movement of funds in digital wallets to supporting earned wage access tools to enabling the faster settlement of major transactions, like buying real estate or a car, Baum explained.

Aside from those consumer uses, the central bank is also keen to assist business-to-business payments. That’s especially true for big corporations that manage cash flow to the hour and that are making investments around the world, Baum said.

Other countries have moved ahead with real-time payments at a faster rate than the U.S. In particular, Brazil has developed the Pix system and India has deployed the Unified Payments Interface.

The FedNow management team is open to learning from those first movers’ experiences and the various officials working on such systems meet regularly, Baum said. The key objective, informed partly by those other countries’ experiences, is to make the system easy to use and safe to use, he said. He noted the success of Brazil in using QR codes in connection with its system.

Brazil’s Pix system is also making headway in enabling the use of that system across borders. The U.S. mega payments processor Fiserv is supporting the Brazilian government in extending the reach of Pix into other countries. Brazilian users of Pix may be able to use the service in the U.S. as soon as the second half of this year.

For FedNow, cross-border capabilities might not be far off either. The Federal Reserve is aware of keen interest from the industry in cross-border capabilities, Baum said. But that will have to follow on creating a solid domestic network first, he said.

“When we build the value of the domestic network, and we can bring the value to the other jurisdictions around the world, I think you'll see us move more quickly,” Baum said, in speaking about the possibility of cross-border FedNow features. “Best guess is we’re at least a couple of years out before you'll see us in the cross-border business.”

The Federal Reserve won’t provide fintechs with direct access to its new instant payments system FedNow, but it’s still courting their participation in the new real-time ecosystem. 

Fintechs can help the Fed see what’s on the horizon for the new faster payment system and allow the new real-time payments services to be easier to use, said Mollie Markham, a Federal Reserve Bank of Chicago industry specialist who works with nonbanks. Fintechs can also assist the Fed in providing services that make the most of FedNow’s data-rich capabilities, she said during a conference this month.

She made the comments at an April 12 fintech conference sponsored by the San Francisco Federal Reserve as well as San Francisco State University and the University of California at Santa Cruz. The conference included a panel discussion with Markham and others addressing the subject of “It Takes a Village — FedNow and Fintech.” The panel also included representatives from the fintechs Plaid and Modern Treasury. 

The Fed is prohibited from connecting directly with fintechs because its congressional mandate only allows it to link with banks, or core service providers acting on behalf of banks. That edict has been a point of contention for fintechs increasingly eager to connect directly to Fed services, such as FedNow, so they can bypass traditional banks and attempt to upgrade banking services. 

The Financial Technology Association, which represents fintechs that include Block, Marqeta, Stripe and Wise, among others, has urged the Fed to make direct access to the new faster payments system more widely available to fintechs. 

Regardless of their direct connection, the Fed sees fintechs as integral to maximizing the benefit of FedNow, its new instant payments system that launched last July.  

“All of those nonbanks are so critical to the payment space because they help us understand what is needed, what customers are demanding (and) not seeing, what's on the horizon that we should be thinking about that,” Markham said at the “The Evolution of Fintech: AI, Payments and Inclusion” conference.

During the panel discussion, Markham made clear that the Fed sees fintechs having a significant role to play in expanding the reach of FedNow. She also underscored the importance of core providers that are enabling banks to connect to FedNow.  

While large banks have their own sophisticated IT systems, regional and community banks often rely on core providers to help them with advanced technology and upgrades. That’s particularly important in the case of FedNow because the effort is focused on extending real-time payments to smaller institutions. Some core providers involved in FedNow include Jack Henry & Associates.  

“Those core providers are really going to help us get the long tail of adoption, and maybe ramp up to a quicker adoption pace as we go,” Markham said. 

The RTP network, initiated by The Clearing House in 2017, has already drawn some banks to such faster payments. TCH is owned by major U.S. banks and so RTP has attracted many large financial institutions.

FedNow had onboarded about 600 of the 10,000 some financial institutions in the U.S. as of March, but Fed officials are in the effort for the long run. Some major banks have not signed on with FedNow. 

Markham said she would pre-empt one question she knew was coming by saying that the Fed isn’t yet willing to disclose FedNow’s payments volume at this time.  

“We're not even a year into the service yet, it is still so early on, and we're still processing our lessons learned before we can share (such volume figures) more broadly,” she said. 

Markham suggested that her fellow panelists and other industry players in the audience could help the Fed zero in on those “volume opportunities” as the central banks seeks to build out FedNow. 

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By Volante Technologies

Quickly transferring money with the push of a finger on a phone wasn’t always a common occurrence. As recently as five years ago, consumers and businesses had little choice but to send wire payments each time they wanted to make quickly cleared and settled payments—real-time payments—from one bank to another. The wire process requires extensive paperwork and approvals in addition to a processing fee that can range from $10 to $25 depending on the bank—hardly a real-time experience, and ill-suited to low-value payments.

Today, that same payer has multiple options to send real-time payments, most notably The Clearing House RTP®, which just celebrated its fourth anniversary, and Zelle, which connects over 500 million accounts. There are also a variety of digital-wallet based services offering rapid transfers to and from conventional bank accounts. In 2023, the Federal Reserve is set to launch its own new payment service, FedNow, which will give businesses and consumers the choice of using a service backed by the full faith and credit of the US government.

Real-time payments are clearly the future of digital spending. But how should banks choose which networks to support and whether to support multiple networks? How can banks differentiate themselves from the pack when it comes to real-time payment offerings and what will happen to ACH, wire and check in the future?

The account-to-account faster payments landscape

First, let’s take a look at what is currently available for immediate account-to-account payments.

Real-time payments have exploded in the U.S. ever since Volante processed the first-ever U.S. RTP in November 2017. Financial institutions across the U.S., regardless of size of location, are taking advantage of the RTP network’s ability to enhance digital payment services for both corporate and retail customers as demand for mobile technology and digital commerce continue to create a larger appetite for safer and faster payments throughout the U.S. At the start of 2022, nearly 200 institutions were connected to RTP, generating over 37m transactions a quarter.

Zelle is among the complementary services that can be settled over the RTP network. Sending Zelle over the RTP network grants financial institutions the opportunity to enable instant settlement while also simplifying back-office processing and improving efficiency and reducing costs. In the second quarter of 2021, Zelle processed $120 billion on 435 million transactions, up from $106 billion during the first quarter of 2021.

Same Day ACH enables traditional ACH transactions to be settled on the same day, in some cases as quickly as hours. While this is not a real-time payment, some use cases—

such as same day payroll, for example—are well served by Same Day ACH, which has an attractive price point for such transactions. By late 2021, NACHA reported over 140m Same Day ACH transactions, showing robust year-over-year growth of 120%.

Strategies for a real-time future

What does the future hold for ACH, wire and check? We don’t expect ACH and wire, or the revenue generated from these types of payments, to completely vanish. Instead, they will coexist with newer real-time services, as has been the case in other countries, such as the United Kingdom. Checks, however, will continue to decline as they are replaced by digital payments.

It’s important to understand real-time payments is a journey—not a destination—for banks and payment service providers. Five years from now, there will be even more real-time payment options. Now is the time to make sure you have a multi-network strategy that can intelligently route payments in the most appropriate manner based on the payment amount, source and destination criteria.

Think about real-time and instant customer experiences instead of payments. Payments are a byproduct of a customer experience, whether it’s leaving a taxi or receiving a package, rather than a distinct workflow step. The more real-time customer experiences you can bring to market, the more compelling your real-time payment services can be.

Now is also the time to learn to speak ISO 20022 fluently. TCH RTP and FedNow both build on the ISO 20022 message standard, which offers extended data possibilities—more information, such as invoices and remittance detail, that can help improve straight-through processing and lower fraud—as well as value-added messages including Request for Pay.

How should banks get started with real-time/instant payments? Whatever the network, the fastest path to future real-time success is through cloud and Payments as a Service (PaaS). This should be the preferred deployment option for payment processing, especially for new payment types like real-time, where no legacy systems are available to be replaced and where it’s important to lower upfront costs while retaining agility and fast time to market.

Adoption of the new FedNow real-time payments system by banks will be a slow process, but it will transform U.S. payments, both for consumers and businesses, ACI Worldwide CEO Thomas Warsop predicted in a conversation with Payments Dive. Ultimately, it will also have a major impact on cross-border payments too, he said.

Coral Gables, Florida-based ACI was instrumental in working with the Federal Reserve to launch the new instant payments system last year and has worked with such systems in other parts of the world. Warsop was appointed to ACI’s top post last year just before the launch of FedNow in July.

In this conversation, Warsop provides his take on whether the U.S. lags other countries with respect to digital payment advances and how it will embrace such offerings in the future.

Editor’s note: This interview has been edited for clarity and brevity.

INDUSTRY DIVE: How do you think the roll-out of FedNow is progressing?

THOMAS WARSOP: The Fed has done a great job of marketing that now. Almost everyone I talk to, no matter what they do for a living or where they live, they know what FedNow is. So that's pretty impressive, honestly, because some other programs, there are other real-time programs in various places in the world where people don't know much about them at all.

I haven't seen any published payments volumes yet. I expect, and I've been very consistent on this, that volumes will be pretty low for a while as, first of all, the financial institutions get signed up, and then there's going to have to be a ramp-up of understanding, more education for consumers and commercial users. And so I think it will be a couple of years before we see very large volumes. 

How does that compare with what you’ve seen in other parts of the world?

India is the largest real-time payments market in the world, with UPI. I think it had over 120 billion transactions, plus or minus a couple billion, in 2023. So, it’s a very large market. It grew quite rapidly. Pix in Brazil is another very large one that grew probably even faster. But a couple of things happened in those countries that we don't have here, including the central bank mandating the use of real-time payments. And so that, obviously, is a big driver. But the other thing is the percentage of the population that is underbanked (that uses the systems). And one great thing about real-time payments is that it helps a lot. We can see it very clearly. There's a high correlation between the use of real-time payments with people that might be underserved by traditional banking. You can't see it in the United States because you just don't have enough experience yet. I would imagine it will be true, but I cannot say positively that it is because we just don't have any data.

FedNow competes with the only other U.S. real-time payments system, The Clearing House’s RTP network. Do you think they will continue to coexist or will one disappear eventually?

It could happen but I think it will be all about interoperability. The important thing is, if I have an account someplace where I have access to the RTP rails, and you have an account, where it's the FedNow rails, I need to be able to send you money or request money from you. If I can't do that, that's going be a big problem, and that will create a lot of pressure to say, “Wait, we got to fix this and have only one,” but technologically, it's not a big deal because the payment standards are very clear.

Is the U.S. falling behind the rest of the world in adopting digital payments schemes more generally?

The United States is the most advanced economy in the world. It functions well, payments function well. Sometimes it seems like the United States is behind, but I think part of the reason is that it's not broken. The system works well. And so there's no crisis, no driving need to change.

Whatever changes need to happen, consumers will drive it. If they want something, it'll happen. The financial institutions can do it. We can do it. There are a lot of things where the technology is not the problem. For instance, with real-time payments, it would be no problem at all for us to allow merchants, say a restaurant, to accept a real-time payment. That's not a problem at all. But the restaurant isn't ready for that. The consumers aren't ready for that. And so it's not the technology. It's not the infrastructure. There are more regulatory things that probably have to get ironed out, especially with cross-border payments, and then there's education for consumers and merchants to realize, “Hey, this actually a good thing we should have.”

Should the U.S. government be pursuing a central bank digital currency and is there a risk to not doing so?

If our leaders, and our economy, don’t keep up with the times and what consumers want, clearly that is a risk. I think as the most advanced economy in the world and the most productive economy in the world, I can't imagine a scenario where we would allow that to happen because we have the tools. It’s just a matter of whether we're going to implement them, how are we going to use them, how are we going to make sure they’re good for our economy.

What else should we all be paying attention to in payments this year?

What I think is the big deal with real-time payments is cross border. We're starting to see some green shoots in cross-border payments and that it is now possible in a very limited way to use Pix, the Brazilian real-time solution, in Argentina. It's very limited. It's kind of hard to do, but it's possible. In Asia, there are four or five real-time payments schemes that can be used cross-border now. So, you're starting to see these things happen and so far it's been in sort of bilateral agreements, two countries or in the case of Asia, four or five have come together. I think over time, you're going to see that continue to expand and I think this is one of the most important things about FedNow because almost all of the largest bilateral trade occurs with the United States on one side or the other. In India, the largest source of money coming into India is the United States. Mexico, same thing. So you have people come and work, they want to send money back to their family. So, that is going to get really cool.

The Federal Reserve has made headway in adding banks to its new FedNow system, with a tally of 400 participating financial institutions, but some of the biggest U.S. banks are still on the sidelines six months after the instant payments service launched.

Bank of America, Citigroup, PNC and Capital One Financial, all among the nation’s 10 largest banks, still haven’t signed on to FedNow, according to the Fed’s latest list of participants.

FedNow launched last July, promising to speed up transactions for consumers and companies. It’s only available through banks so the Federal Reserve and its FedNow staff have been on a campaign, including via webinars and public communications, to encourage more banks to hook up to the system. The more financial institutions join, the more attractive the network becomes because of increased reach.

In response to a request for comment, a Fed spokesperson, Cassie Burica, noted that some non-participant banks were involved with FedNow’s prior pilot program, suggesting they’ll eventually join. Burica also noted that the CEOs of two banks, Citi and Bank of America, said during a Senate Banking Committee hearing last month that their banks plan to sign on “in the coming months.”

A spokesperson for Citi suggested the same. “We are highly supportive of FedNow and it was always part of our plan to participate,” said Karen Kearns, a spokesperson for the New York-based company. “We plan to be ready to go live on the platform in the first half of 2024.” Kearns also noted that Citi has invested “heavily in instant payments with direct access across 65 countries,” including via FedNow’s U.S. rival, the RTP network.

A spokesperson for Bank of America declined to comment. PNC and Capital One didn’t immediately respond to a request for comment.

To be sure, the biggest U.S. bank, JPMorgan Chase, was connected to FedNow early on, and Wells Fargo and U.S. Bank have also joined the network, so there is support from major U.S. institutions.

Still, FedNow has been getting traction only slowly. There are nearly 10,000 banks and credit unions across the country, so the bulk of them are not on board. And of the ones that have connected, many are only receiving payments and haven’t set up their systems to send payments.

While the start of FedNow is also prompting more adoption at the rival RTP network, which was launched in 2017, the U.S. still lags behind other countries in fostering instant payment systems. Some of those countries, including India and Brazil, have made progress by mandating use of the real-time systems.

“We are kind of taking this laissez-faire market approach, but right now it’s kind of a mess,” said Peter Tapling, an industry consultant based in the Chicago area. “We lag woefully behind,” he said of the U.S.

It might seem that two systems would be better than one in playing catch-up, but that’s not necessarily the case because the competition could be causing some banks to drag their feet on FedNow. That’s partly because The Clearing House, which operates RTP, is owned by a pack of big U.S. banks, including Citi, PNC, Capital One and Bank of America. “There is going to be a period of time where people will pick sides,” Tapling said.

And RTP isn’t the only payments service that may face competition from FedNow. Debit and credit card transactions could ultimately be reduced if instant payments catch on and that may eat into the interchange fees that banks derive from the cards they issue. 

“To the extent that FedNow creates the possibility to go around the card networks, that represents a competitive threat,” said Jim Angel, a Georgetown University professor who served on a U.S. faster payments task force.

Some banks will wonder why they should rob RTP of revenue and take on the additional cost of adding FedNow when the government system doesn’t even have a rich set of financial institutions using it yet, Tapling explained. “Volumes on these networks are so low,” Tapling said, estimating thousands of transactions occur daily on FedNow.

Aside from that lack of benefit in hurrying to join FedNow, there are also likely bugs in the system that have yet to be worked out. “Let other people incur the teething costs” is how some banks are likely to see the situation, Angel said. They’ll watch other banks test the system, and then join FedNow when it has critical mass and they can benefit from second-mover advantage, he predicted. 

If you want to attract attention to a market, create a rivalry. That’s the lesson learned so far this year from a rush by U.S. banks and credit unions to adopt real-time payments services.

The Clearing House began selling its RTP network services in 2017, becoming the first entity to offer real-time payments services in the U.S. Since then it’s been a slog to attract banks and credit unions to connect to the network. But after the Federal Reserve launched the competing system FedNow in July, interest surged.

About 200 banks and credit unions have joined the RTP network this year as of Friday, with about 130, or two-thirds, jumping on board since July, a spokesperson for TCH said. That annual tally is already double the number of financial institutions that hooked up to RTP last year. It now has a total of 460 participants.

And FedNow has been pulling in new participants too, with about 320 connecting so far, up from the less than 50 that were there at the start. 

“FedNow goes live, and we start onboarding four times as many banks to the RTP network as we had done previously,” David Watson, CEO of The Clearing House, said in an interview Tuesday.

The increase in real-time payments activity is a potential boon to the U.S. economy. As payments move faster, commerce does too. With real-time payments, transactions can be completed in minutes as opposed to days.

Real-time payments are expected to comprise 27.8% of all electronic payments worldwide by 2027, relative to 18% last year, according to an ACI Worldwide report in March. Meanwhile, U.S. real-time payments amounted to just 1.2% last year.

Watson chalks up the earlier sluggish start partly to confusion created in the market after the Fed initially sought to collaborate with the private sector on faster payments, circa 2015, and later began developing its own system.

“We then had one system live, and a second system planned — the majority of the country stepped back and said, ‘Let’s do nothing and see what happens,’” Watson observed. “We probably lost about five years as a country as a result.”

A spokesperson for the Fed declined to comment on the RTP adoption surge, but provided an update on FedNow. “We see a lot of growing momentum in the pipeline,” FedNow Chief Executive Nick Stanescu said in an emailed statement from the spokesperson. “I’m excited to see how the service will grow and help bring the benefits of instant payments to households and businesses nationwide.”

Watson, a native Scotsman who took the top post at The Clearing House in February, acknowledges the U.S. is playing catch-up with other countries that have moved ahead with real-time payments systems much faster. At the same time, he appreciates that the U.S. wouldn’t impose mandates that force the issue, as has been the case in other countries, such as India.

RTP has been a harder sell partly because The Clearing House is owned by the largest banks in the country and the smaller financial institutions have been reluctant to sign up for a system controlled by bigger rivals. FedNow was launched partly to solve that problem.

With nearly 10,000 financial institutions in the country, there is a long way to go. Only financial institutions can connect to the speedier services, and development of use cases for businesses and consumer services have been slow in arriving. Ultimately, the expectation is that those users will create more momentum for increased adoption as they demand more efficient transactions.

For the moment though, the five limbo years allowed pseudo real-time offerings to enter the market and create distractions for users, Watson contends. With those types of services, which would include Zelle offered by Early Warning Services, it appears that the payment settles in real-time, but it’s really just another party stepping in to take on the risk of providing immediate payment while the transaction actually settles on slower payment rails, such as ACH.

“That’s probably not helped us as a country,” Watson said. “Because people are not walking around saying ‘I don't have it — I need it,’ because they think they do, even though they don’t.” 

The Clearing House, which clears and settles about $2 trillion in the U.S. each day, is hyper-focused on buttressing demand for real-time payments in the U.S. with Watson building a new team to spearhead the effort. Last month, he hired Keith Melton, who formerly headed up product management at the Federal Reserve Bank of Atlanta, as a strategic program manager for RTP. And this week he named TCH’s first chief strategy officer to help streamline TCH’s focus.

While competition between RTP and FedNow will remain, Watson expects the two will work together to spur more nationwide adoption of real-time payments.

“Yes, we’ll compete, but at the end of the day, we’re both working in organizations that are not driven by commercial profit,” Watson said. “We’re both working in organizations driven by the impact we can have to the economy.”